Outsourcing costs weigh on advisers’ minds

Cost is a “big hurdle” for advisers who are interested in being able to offer outsourced solutions to their clients, Ben Willis of Whitechurch Securities has suggested.

He explained: “Cost is a big hurdle to get over when speaking to advisers, as they often see outsourced solutions as adding fees onto the client, while struggling to justify why they are still charging their fees.”

Mr Willis, who is head of research at Whitechurch, which runs outsourced investment solutions for advisers, continued: “Ultimately, it is about adding value. The adviser will have conducted the due diligence to ascertain what the best possible outsourced investment solution is for the client.

“Of course, there are extra charges, but by outsourcing the adviser is leaving the investment decisions in the hands of professional investors, whose sole role is research, make asset allocation decisions and manage the clients’ investments.

“Because of this, it is assumed that better long-term investment returns can be generated for the end client, thus negating the additional costs.”

But Jaskarn Pawar, chartered financial planner at Investor Profile, confirmed the firm has used an outsourced investment research provider for the past two years and had opted not to pass on the cost to clients.

“We just take the hit and see it as a cost/service that improves our professional approach,” he said.

Mr Pawar added: “The reason we outsource the construction of model portfolios is that it gives us comfort in the fact that we are more independent and unbiased than if it was left up to us to choose our funds and models.”

The reason we outsource the construction of model portfolios is that it gives us comfort.

Jaskarn Pawar

But Mike Barrett, consulting director at the lang cat, suggested there was “no correlation between the cost of the portfolios and the returns being generated”.

In the lang cat’s joint report with CWC Research, ‘Never mind the quality, feel the width 3’, it revealed more than three quarters of respondents said they do not charge new clients who move existing investments into their model portfolio service.

The report found that despite the pressure to keep costs down for clients, more advisers in 2017 said charges are “fairly important” than “very important” compared to when they were last asked this question (see chart below).

Source: the lang cat and CWC Research

The lang cat said: “If we keep in mind that this is due to the majority having already filtered funds by the portfolio selection stage, and so looking only at those that are cheaper, even if active, it starts to make more sense.

“We found that firms who only used passive, low cost funds and answered ‘fairly important’, were only looking within a range of funds that fitted this. Within that range, tracking error is a more important selection criterion than cost.”

Mr Willis acknowledged one of the benefits for the adviser of outsourcing was being able to spend more time with clients on “a holistic basis”.